Disinvestment of PSUs: A prudent strategy or disaster capitalism

Mr. Narendra Modi, before becoming Prime Minister, once said, “the government has no business to
be in business.” The Indian government has stood by this principle in recent years. Since 2014, the
government has raised about Rs. 4 lakh crore from the disinvestment of public sector enterprises,
compared to Rs 1.07 lakh crore collected during the 2004-14 period by the UPA alliance. The
government has sold minority stakes in public companies to raise revenue while retaining
management control during past years. However, an ideological shift is observed in recent times.
The government is signaling complete privatization of most PSUs and retaining only a few in strategic
sectors like defense, coal, and space.

The Pros

Private sector companies face unfair competition from the presence of PSUs in the market as they
have access to additional capital from the government. As a result, the private company can be
driven out of the market when competing with a PSU. But the privatization of PSUs will ensure a
level playing field and may drive up investments from the private sector. Another problem with the
PSUs is the conflict of interest that arises when the government acts as a regulator and the player.
The rules are in favor of PSUs, providing them an undue advantage over other companies.

Also, an additional benefit that public sector enterprises enjoy is an implicit government guarantee
while raising capital from the market. As seen in the case of Air India, which has a currently
outstanding debt of more than 50,000 crores, while Jet Airways went out of business with 25,000
crores debt.

The Cons

The timing of the policy shift from the minority divestment policy of the government is questionable.
Is the change in policy out of necessity to cover up the fiscal deficit target caused by the pandemic,
or is there a genuine concern to improve PSUs through privatization? Also, with the pandemic
causing a slowdown in the economy, there is a need for substantial public investments and subsidies
that may be missing in case the PSUs are privatized. Restructuring the public sector enterprises will
also be a challenge if the government completely divests its ownership in PSUs. With a large
employee base and infrastructure, privatization will require a clear vision and strategy.

The Way Forward

Privatization of PSUs should not be viewed as a revenue generation exercise. Instead, it should be
done to improve the efficiency and working of the entity and better use of the resources at its
disposal. Additionally, the government should define a clear path and strategy for the PSUs to be
divested to smoothen the transition from the public sector enterprise to a private entity.